Last week, I pushed against a popular account of Walter Bagehot’s Lombard Street that I think misconstrues exactly what Bagehot was trying to do (and the context within which he was doing it). My brilliant live-in editor tells me that (1) Bagehot really isn’t that popular, so I may be overstating how much people have misconstrued him; and (2) I sounded like I thought Bagehot just wasn’t all that important.
The first is likely true—outside of central banking circles and historians of the 19th century, Walter Bagehot is probably not an active topic of conversation at very many dinner tables or in very many seminar rooms. But he is alive and well in central banking. Kate Judge’s recent paper notes that central bankers during the crisis invoked his name constantly to explain their policy reactions (see especially pp 13-17). Those conversations are the target of my critique.
If true, the second point—that I just don’t think Bagehot is that important—is my terrible mistake.Lombard Street may well be the book that has had the greatest intellectual influence on me as a scholar of central banking. It’s the misinterpretation of Bagehot that I find so interesting; his influence is a sociological fact, and one I readily accept.
If the subsequent interpretation of “Bagehot’s dictum” is wide the mark, and Bagehot is and should be influential, what was Bagehot really saying and why was it so important?
I argue that Lombard Street is less about the prescription for central banks in crises and more about what we have come to call “central bank transparency.” He makes two arguments along these lines, one (relatively minor) stylistic point and the other (essential) substantive point.
Stylistically, he has this to say, in the very first lines of the book:
I venture to call this Essay ‘Lombard Street,’ and not the ‘Money Market,’ or any such phrase, because I wish to deal, and to show that I mean to deal, with concrete realities. A notion prevails that the Money Market is something so impalpable that it can only be spoken of in very abstract words, and that therefore books on it must always be exceedingly difficult. But I maintain that the Money Market is as concrete and real as anything else; that it can be described in as plain words; that it is the writer’s fault if what he says is not clear.
(The emphasis is mine). Part of the mystique of central banking—and, I think, the reason for its otherwise inexplicable neglect as a subject of inquiry by legal scholars (with obvious and importantexceptions)—is that, stylistically, there is such a hedge built around the technical details of central banking that it has become a playground for specialists only. Jargon abounds, perhaps in ways that facilitates communication among specialists but impedes participation from those who are coming at this from very different perspectives, including lawyers and citizen generally.
Bagehot was fighting this tendency toward abstract and technical writing and puts all the blame for such on the writers, not the readers. This point is powerful, even unanswerable. It is a failure of those writers who have made central banks and central banking the stuff of concepts “so impalpable that [they] can only be spoken in very abstract words,” of books that must necessarily “always be exceedingly difficult.” (Again, lots of exceptions here of excellent, lucid writing on central banking.)
Bagehot’s truth is this: Complex ideas can be expressed simply and elegantly. It’s the fault of the writer if the final result is full of ambiguity, misdirection, unnecessarily technical language, or simply very boring sentences. (Steven Pinker has just published a phenomenal book, The Sense of Style, that makes this case more powerfully, with many examples. I think Pinker should be required reading for legal scholars writing about technical subjects).
Now, this is a perhaps minor point in the context of the book. Bagehot opens Lombard Street by making it, but he doesn’t pick up the theme again. His main substantive point about the practice of central banking, though, is closely related to it. Lombard Street was not his effort to argue what the Bank of England should do during liquidity crises, as almost all people assume; it was an argument about what the Bank of England should openly acknowledge that it had already done. He puts it this way (on page 36 of this edition):
The practice of the Bank [as a lender of last resort] has, as we all know, been much and greatly improved. They do not now manage like the other Banks in Lombard Street. They keep an altogether different kind and quantity of reserve; but though the practice is mended the theory is not. There has never been a distinct resolution passed by the Directors of the Bank of England, and communicated by them to the public, stating even in the most general manner, how much reserve they mean to keep or how much they do not mean, or by what principle in this important matter they will be guided.
It is this failure of the Bank of England—the failure to acknowledge that they kept the central reserve, that they were the lender of last resort—that set Bagehot off. The rest of the book is an argument about why this acknowledgment is so important, and why the counter-arguments about moral hazard fail to carry the day.
I argued last week that I am not completely convinced that Bagehot’s 19th century descriptive effort fits the context of 21st century finance. I think it’s an open question. But the idea that central banks must acknowledge in public what they do behind the scenes is an incredibly provocative one worthy of 21st century examination.
Of course, that’s not an argument original with me. Central bank transparency has been a cause celebre by academics and central bankers like Alan Blinder (see especially here) and Ben Bernanke (see especially here) for decades. And under Bernanke’s leadership, the Fed has become dramatically more transparent. I think it safe to say that the Bagehot’s longed-for “revolution,” in Blinder’s term, has finally begun in earnest.
The progress toward transparency is what makes the Fed’s decision to seal the so-called “Doomsday Book”—a collection of legal opinions that outlines the Fed’s emergency lending authorities—so troubling to me. We knew that such a book existed at least since former Treasury Secretary Tim Geithner’s memoir was published (see pp 83 and 151). But now that we know it exists, we also know that we can’t examine the thing. Not even through litigation.
I fear that this may be part of a broader and quite dispiriting trend at the Fed. (I’ve written elsewhere about the difficulties I have found as a scholar getting access to forty-year-old documents before). Disclosure of these documents would provide an important—I think essential—perspective on exactly what we can expect from our central bank as a matter of law in a time of crisis. They may have acted as we would hope they would, but I’m with Bagehot: seeing the correct result eventually is not enough. We need to know the process that shapes that final result, too.